Irish crisis among developed world's worst, say researchers


BY MOST measures, Ireland has suffered one of the worst financial and economic crises ever experienced in a developed country, according to a new research paper by two central bank economists.

The pair, Maria Woods and Siobhán O’Connell, compare Ireland’s economic/financial crisis with four others crashes, all of which began 20 years ago. The crises took place in Finland, Norway, Sweden and Japan. More recent crises, such as those of Iceland and the Baltic economies are not included.

The research finds the decline in Irish house prices has been bigger than those experienced in any of these four economies studied. Following the crises in the Nordic three and Japan, residential property prices took 11-22 years to return to peak levels. If prices in Ireland follow the pattern in the worst-affected of the four countries (Japan), they will return to 2007 levels only in 2028.

Ireland’s jobs crisis is similar in magnitude to Finland’s in the 1990s, and much more serious than the three other economies.

Although not discussed by the authors, the long-run effects on employment of large financial crises are illustrated by Finland’s experience in the decades since its crisis. In 2011, the numbers at work in the Nordic economy were below levels in 1989.

Irish share prices also suffered the largest peak-to-trough fall among the five. A decline of more than three-quarters over a three-year period was marginally bigger than the fall in Japanese equity prices, whose fall took place over a period of 14 years.

Comparing the worst year for loan losses in the banking sector, the authors find Ireland’s crisis by far the worst. While losses in the other four economies averaged 3.5 per cent of gross domestic product,Irish banks loan losses in 2010 stood at 23 per cent of GDP.

They find credit growth before the crisis was higher in Ireland. Ominously, the average decline in peak-to-trough bank lending among the four comparator economies was more than one-fifth. Bank lending in Ireland peaked just three years ago and has fallen by only 8.5 per cent. This suggests the credit contraction could remain severe for some time.

The study finds that Irish banks’ proportion of non-performing loans is higher than the peaks recorded in any of the Nordic economies but lower than the worst point in Japan’s crisis. The paper is titled Ireland’s Financial Crisis: A Comparative Context.